Source - RNS
RNS Number : 0704L
GKN Holdings PLC
28 September 2016
 

GKN Holdings plc Results Announcement for the six months ended 30 June 2016

 

This announcement is made in connection with GKN Holdings plc's 6.75% Bonds due 2019 and 5.375% Bonds due 2022.  The shares of GKN Holdings plc are not listed; the Company is a wholly owned subsidiary of GKN plc, the ultimate holding company of the GKN Group.

 

This announcement can be viewed at or downloaded from www.gkn.com/investorrelations.

 

 

Cautionary Statement

 

This announcement contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast.

 

 

Group Overview

 

Markets

 

The Group operates in the global aerospace, automotive and land systems markets. GKN Aerospace sells to manufacturers of commercial and military aircraft, aircraft engines and equipment. In the automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles. Around 80% of GKN Powder Metallurgy sales are also to the automotive market, with the balance to other industrial customers. GKN Land Systems sells to producers of agricultural, industrial and construction equipment.

 

Results

 

Group

First half

2016

First half 2015

Change (%)


GKN base

Fokker

 

Total 


Headline

Organic

Sales (£m)

4,149

369

4,518 

3,853 

17

2

Trading profit (£m)

362

28

390 

346 

13

(3)

Trading margin (%)

8.7%

7.6%

8.6% 

9.0% 



Return on average invested capital (%)

16.6%



17.5% 



 

Organic sales increased £92 million (2%). The effect of currency translation on management sales was a £202 million benefit and there was a £371 million benefit from acquisitions. 

 

Overall organic trading profit reduced by £10 million (3%). There was a benefit from currency translation of £22 million and a £32 million increase due to acquisitions (including the absence of £3 million acquisition costs in the first half of 2015).

 

Group trading margin in the first half was 8.6% (2015: 9.0%). Return on average invested capital (ROIC) was 16.6% (2015: 17.5%), excluding Fokker which has not been owned for a full 12 month period.

 

At 30 June 2016, the Group had net debt of £918 million (31 December 2015: £769 million) and the total deficit on post-employment obligations totalled £2,101 million (31 December 2015: £1,558 million).

 



 

Divisional Performance

 

GKN Aerospace

 

GKN Aerospace is a leading global tier one supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies and aftermarket services. It supplies products and services to a wide range of commercial and military aircraft and engine prime contractors and other tier one suppliers.

 

According to external forecasts, the overall aerospace market is expected to be slightly down in 2016. In commercial, both Airbus and Boeing continued to benefit from higher deliveries and a record order backlog, and both have announced plans to increase production levels for single aisle aircraft in the future. The short term outlook for wide-body aircraft has been mixed with A330 and Boeing 777 rate reductions in advance of their next generation successors and plans for a reduction in A380 deliveries, while the A350 continues to ramp-up to full rate production. Sales of business jets and commercial rotorcraft are both expected to fall. Military sales are higher and will benefit from the ramp up in the production rate of the F-35. 

 

The key financial results for the period are as follows:

 

GKN Aerospace

First half 2016

First half 2015

Change (%)


GKN base

Fokker

 

Total 


Headline

Organic

Sales (£m)

1,262

369

1,631 

1,171 

39

2

Trading profit (£m)

133

28

161 

133 

21

(6)

Trading margin (%)

10.5%

7.6%

9.9% 

11.4% 



Return on average invested capital (%)

16.8%



17.7% 



 

Overall, GKN Aerospace's organic sales were £30 million higher (2%). There was a £59 million (5%) benefit from currency translation and sales from acquisitions amounted to £371 million.  

 

The organic reduction in trading profit was £9 million, due to the transition from more profitable mature military and commercial programmes, partly offset by good growth and catch-up payments in engine spares and the benefit from the ramping up of structures production on new programmes. There was a favourable currency translation impact of £8 million and the profit contribution from acquisitions was £29 million.

 

Trading margin was 9.9% (2015: 11.4%). Return on average invested capital, excluding Fokker which has not been owned for a full 12 month period, was 16.8% (2015: 17.7%). 

 

The division's commercial sales were 76%, with military 24%. Organic commercial aerospace sales were 8% higher, benefiting from stronger orders for the A350, A320 and Boeing 737 partly offset by a reduction in A330 production. Military organic sales were 14% lower, primarily due to lower sales for F/A-18 Super Hornet, F-15 Eagle and rotorcraft. 

 

The integration of Fokker Technologies, acquired on 28 October 2015, is proceeding well. It added sales of £369 million and a profit of £28 million. Restructuring costs, which are excluded from Management profits, were £22 million during the first half and are expected to total around €50 million (£39 million) in the year, as previously announced. During the period, the outstanding pre-acquisition fine that was agreed with the Department of Justice was settled.

 

During the period, new and replacement work packages totalling $5 billion over their contract lives have been won and a number of important milestones were achieved, including:

·     An agreement to extend to the risk and revenue sharing partnership (RRSP) with Rolls-Royce on the Trent XWB engine. The agreement covers the design and supply of a lower weight, higher performance intermediate compressor case for the enhanced performance Trent XWB-84 engine; 

·     Signing a long term agreement with Mitsubishi Heavy Industries Ltd. to manufacture aero-engine casings for Rolls-Royce Trent engines which will power Airbus A330neo and Boeing 787 aircraft;

·     Partnering with Rolls-Royce on the UltraFan™ large engine programme, with responsibility for the intercase;

·     Being named by the US Air Force as one of seven major contractors who will join Northrop Grumman in building the next-generation B-21 bomber;

·     Signing a four-year contract extension with FMV (Swedish Defence Material Administration) to provide comprehensive support for the GKN Aerospace RM12 engine, which powers the JAS 39 Gripen C/D fighter; and

·     Extending an agreement with Boeing for a further three years to continue manufacturing electrical wiring systems and junction boxes for the 777 and 737 aircraft programmes and signing a memorandum of agreement with UTC Aerospace Systems to develop electrical integrated systems for the More Electric Aircraft initiative. 

 

Automotive market

 

The major automotive markets of China, India, Europe, and North America experienced increased production in the first half of the year compared to 2015, while Brazil and Japan declined. Overall, global production volumes increased 2.4% to 45.9 million vehicles (2015: 44.9 million).

 

Car and light vehicle production (rounded millions of units)

First half

Growth


2016

2015

(%)(#)

Europe

11.4

10.9

   4.5

North America

  9.1

  8.8

   3.3

Brazil

  1.0

  1.2

-22.2

Japan

  4.3

  4.4

  -2.7

China

12.4

11.7

   5.9

India

  2.0

  1.9

   6.4

Others

  5.7

  6.0

  -5.0

Total - global

45.9

44.9

   2.4

Source: IHS Automotive; (#) Growth is derived from unrounded production figures

 

Production in Europe increased in the first half of 2016 as demand in Western Europe continued to recover, partly offset by the decline in Russia.

 

Production in North America benefitted from continuing consumer confidence and localisation of foreign manufacturers' capacity. Cheap credit and the low price of fuel supported increased demand and production for full-size pickups and Sport Utility Vehicles (SUVs), which outpaced that of passenger cars. The recession in the Brazilian vehicle market deepened, resulting in a further decline in output.

 

Production growth in China resulted from the positive impact of the reduction in sales tax on small cars.  Production in India increased due to improved economic conditions and higher demand for newly launched models. Japanese production, however, was adversely affected by the earthquakes in southern Japan and output stoppages at some manufacturers due to fuel economy irregularities.

 

External forecasts anticipate global production for full year 2016 will increase 2.9% to 91.3 million vehicles.

 



 

GKN Driveline

 

GKN Driveline is the world's leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems, for use in everything from the smallest low-cost car to the most sophisticated premium vehicle demanding complex driving dynamics.

 

The key financial results for the period are as follows:

 

GKN Driveline

 First half

Change (%)


2016 

2015 

Headline

Organic

Sales (£m)

2,002

1,814

10

5

Trading profit (£m)

164

150

9

3

Trading margin (%)

8.2%

8.3%



Return on average invested capital (%)

18.5%

19.6%



 

Organic sales increased by £95 million (5%) compared with global light vehicle production which was up 2%. The beneficial effect of currency translation was £93 million (5%). Constant Velocity Jointed (CVJ) Systems accounted for 60% of sales and non-CVJ sales were 40%. 

 

The organic improvement in trading profit was £5 million and the positive impact of currency translation was £9 million. GKN Driveline's trading margin was 8.2% (2015: 8.3%).  Return on average invested capital was 18.5% (2015: 19.6%).

 

GKN Driveline's market outperformance was mainly in Europe reflecting recent market share gains and new customer programme launches, for example, with Daimler and Volvo. It also benefited from a stronger position in premium vehicles, demand for which continued to be positive, and a broadening product mix, particularly with AWD systems. GKN Driveline performed broadly in line with the market in the Americas (reflecting its lower content on truck-based platforms) and slightly below the market in China (recognising its greater exposure to global brands, which performed less strongly than domestic producers). Growth in North America and China is expected to be above the market in the second half due to the strong order book and new programme launches.

 

In terms of profitability, European plants were running at very high capacity utilisation with a strong conversion on the additional sales. In China, production was relatively stable following the tax incentives available for small cars, but margin was slightly lower, due to negative pricing, in-line with expectations. The Americas operations were impacted by short term production issues at AWD facilities as customers struggled to obtain parts following the Japanese earthquake and sizeable additional launch costs on a new global AWD programme. These launch problems have now been addressed with production reaching target levels, however, some further launch costs will be incurred in the second half.  The technology developed provides an excellent platform for continued success in AWD.

 

To provide better strategic and customer alignment, GKN Driveline is reorganising in the second half of the year from three regions into two global product lines (CVJ and AWD/eDrive) which will provide a more efficient, leaner organisation.

 

During the period, more than £400 million of annualised sales in new and replacement business was secured and a number of important milestones achieved, including:

·     Being selected by BMW to supply its eAxle on the BMW 2 Series Active Tourer;

·     Winning an Automotive News PACE award for VL3 sideshaft technology, which debuted on the BMW 7 Series, whilst also picking up an innovation partnership award for work on the Ford Focus RS; and

·     GKN Driveline Brazil being awarded Toyota's prestigious South America Supplier Quality Excellence Performance Award for the third year in a row.

 



 

GKN Powder Metallurgy

 

GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes. GKN Sinter Metals is the world's leading manufacturer of precision automotive sintered components as well as components for industrial and consumer applications. Hoeganaes is one of the world's leading manufacturers of metal powder, the essential raw material for powder metallurgy.

 

The key financial results for the period are as follows:

 

GKN Powder Metallurgy

 First half

Change (%)


2016

2015 

Headline

Organic

Sales (£m)

499 

474 

5

(1)

Trading profit (£m)

63 

56 

13

5

Trading margin (%)

12.6% 

11.8% 



Return on average invested capital (%)

21.3% 

22.0% 



 

Organic sales were £3 million lower, after the £14 million pass through to customers of lower steel prices and other surcharges. There was a £28 million (6%) benefit from currency translation.

 

Underlying growth (before raw material pass through) was 2%, in line with global light vehicle production. Underlying sales growth was achieved in all regions with the strongest performance being in Asia.

 

The organic increase in trading profit was £3 million and there was a £4 million gain on currency translation. The divisional trading margin was 12.6% (2015: 11.8%) reflecting the move towards higher value "design for powder metallurgy" parts and a small margin benefit from lower raw material prices passed through to customers. Return on average invested capital was 21.3% (2015: 22.0%).

 

During the period, GKN Powder Metallurgy achieved a number of important milestones, which included:

·     Winning, in just six months, around £120 million of annualised sales in new and replacement business;

·     The commencement of production of high quality automotive grade powders in China for the Asian market; and

·     Receiving three prestigious design awards from the Metal Powder Industries Federation (MPIF) at the annual technical conference POWDERMET2016.

 

GKN Land Systems

 

GKN Land Systems is a leading supplier of power management products and services. It designs, manufactures and supplies products and services for the agricultural and construction markets and key industrial segments, offering integrated powertrain solutions and complete in-service support.

 

Sales in GKN Land Systems were lower than the prior period primarily due to a significant decline in North American agricultural equipment markets and the ending of a chassis contract. Demand for construction equipment was also weaker while industrial sales remained relatively stable. 

 

The key financial results for the period are as follows:

 

GKN Land Systems

 First half

Change (%)


2016

2015 

Headline

Organic

Sales (£m)

368 

371 

(1)

(6)

Trading profit (£m)

17 

15 

13

6

Trading margin (%)

4.6% 

4.0% 



Return on average invested capital (%)

7.4% 

7.6% 



 

The organic decrease in sales was £24 million (6%) and the beneficial impact of currency translation was £21 million (5%). The first of two chassis contracts ending in 2016 reduced sales by £5 million in the first half. The second contract ends during the third quarter of 2016.

Trading profit was £1 million higher on an organic basis and there was a £1 million benefit from currency translation. Trading margin was 4.6% (2015: 4.0%). Return on average invested capital was 7.4% (2015: 7.6%). 

 

End markets remain tough, particularly in North American agricultural equipment. Nevertheless, progress has been made with many mid-tier customers and important new business won in the industrial, shaft and wheels operations, whilst continuing to invest in technology.  

 

Other Businesses and corporate costs

 

GKN's Other Businesses comprise Cylinder Liners (which is a 59% owned venture mainly in China, manufacturing engine liners for the truck market in the US, Europe and China), EVO eDrive Systems (a developer of axial flux motors) and GKN Hybrid Power (a flywheel energy storage and hybrid system manufacturer).

 

GKN's Other Businesses reported combined sales in the period of £18 million (2015: £23 million). The change reflects a £6 million organic decrease in sales and £1 million benefit from currency translation. A trading loss of £4 million was reported in the first half (2015: £2 million loss) reflecting a restructuring charge at GKN Hybrid Power. Following changes in the commercial landscape of the UK bus market, it has been decided to scale back this operation back and combine it with GKN Driveline's hybrid and electric engineering resource.

 

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group's legacy businesses, were £11 million (2015: £6 million, including a £7 million past service credit following completion of a Pension Increase Exchange exercise in the UK and £3 million of costs in relation to the Fokker acquisition).

 

Other Financial Information

 

All comparative information provided below relates to the first half of 2015, unless otherwise stated.

 

Items excluded from management trading profit

 

In order to achieve consistency and comparability between reporting periods the following items are excluded from management measures as they do not reflect trading activity:  

 

Change in value of derivative and other financial instruments

 

The change in value of derivative and other financial instruments during the period resulted in a loss of £71 million (2015: £20 million loss).

 

When the business wins long term customer contracts that are in a foreign currency, the Group offsets the potential volatility of future cash flows by hedging through forward foreign currency exchange contracts. At each period end, the Group is required to mark to market these contracts even though it has no intention of closing them out in advance of their maturity dates.

 

At 30 June 2016, the net fair value of such instruments was a liability of £399 million (31 December 2015: liability of £351 million) and the change in fair value during the period was a £52 million charge (2015: £31 million charge).

 

There was also a £3 million credit arising from the change in fair value of embedded derivatives in the period (2015: nil) and a net loss of £22 million attributable to the currency impact on Group funding balances (2015: £11 million net gain).



 

Amortisation of non-operating intangible assets arising on business combinations

 

The charge for amortisation of non-operating intangible assets arising on business combinations (for example customer contracts, order backlog, technology and intellectual property rights) was £46 million (2015: £36 million).

 

Gains and losses on changes in Group structure

 

There was no change in Group structure during the period (2015: £5 million loss).

 

Restructuring charges

 

During the period there has been a charge of £22 million in relation to redundancy and integration costs relating to the Group's acquisition of Fokker in 2015.

 

Post-tax earnings of equity accounted investments

 

On a management basis, the sales and trading profits of equity accounted investments are included pro-rata in the individual divisions to which they relate, although shown separately post-tax in the statutory income statement. 

 

The Group's share of post-tax earnings on a management basis was £34 million (2015: £34 million), with trading profit of £42 million (2015: £40 million). The Group's share of the tax charge amounted to £8 million (2015: £6 million) with no net financing costs in either period. The organic decrease in trading profit was £1 million.

 

Net financing costs

 

Net financing costs totalled £61 million (2015: £67 million) and comprise the net interest payable of £38 million (2015: £33 million), the non-cash charge on post-employment benefits of £27 million (2015: £25 million), a gain from fair value changes on cross currency interest rate swaps of £5 million (2015: £6 million charge) and charge for unwind of discounts of £1 million (2015: £3 million). The non-cash charge on post-employment benefits, fair value changes on cross currency interest rate swaps and unwind of discounts are not included in management figures. Details of the assumptions used in calculating post-employment costs are provided in note 9.

 

Profit before tax

 

Management profit before tax was £344 million (2015: £307 million). Profit before tax on a statutory basis was £182 million (2015: £212 million). The main differences between management and statutory figures for 2016 are the change in value of derivative and other financial instruments, amortisation of non-operating intangible assets arising on business combinations, restructuring charges and non-cash charge on post-employment benefits. Further details are provided in note 3 to the interim financial statements.

 

Taxation

 

The tax charge on statutory profits of subsidiaries was £20 million (2015: £49 million charge). The decrease is largely as a result of certain foreign exchange gains which are not taxable.



 

Non-controlling interests

 

The profit attributable to non-controlling interests was £2 million (2015: £3 million).

 

Cash flow

 

Operating cash flow, which is defined as cash generated from operations of £164 million (2015: £155 million) adjusted for capital expenditure (net of proceeds from capital grants) of £227 million (2015: £198 million), proceeds from the disposal/realisation of fixed assets of £25 million (2015: £2 million), was an outflow of £38 million (2015: outflow of £41 million).

 

Cash generated from operations includes movements in working capital and provisions totalling a net outflow of £188 million (2015: £142 million outflow), driven by a VAT payment following the substantial one-off customer advance received at the end of 2015.

 

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £227 million (2015: £198 million). Of this, £192 million (2015: £166 million) was on tangible fixed assets and was 1.5 times (2015: 1.6 times) the depreciation charge. Expenditure on intangible assets, mainly non-recurring costs on Aerospace programmes, totalled £35 million (2015: £32 million). 

 

Net interest paid totalled £23 million (2015: £21 million). Tax paid in the period was £45 million (2015: £61 million).

 

Net debt

 

At the end of the period, the Group had net debt of £918 million (31 December 2015: £769 million). At 30 June 2016 the fair value of cross currency interest rate swaps, taken out to better align foreign currency income receipts with debt coupon payments, was a liability of £165 million (31 December 2015: liability of £69 million) which is included in net debt.

 

Pensions and post-employment obligations

 

GKN operates a number of defined benefit pension schemes and historical retiree medical plans across the Group. 

 

At 30 June 2016, the total deficit on post-employment obligations of the Group totalled £2,101 million (31 December 2015: £1,558 million), comprising deficits on funded obligations of £1,367 million (31 December 2015: £1,007 million) and on unfunded obligations of £734 million (31 December 2015: £551 million). In total, the deficit increased £543 million from 31 December 2015, primarily due to changes in the discount rates used and adverse currency movements.

 

The amount included within trading profit for the period comprises current service cost of £25 million (2015: £27 million) and administrative costs of £2 million (2015: £1 million). There was no past service credit in the period (2015: settlement credit of £6 million). The interest charge on net defined benefit plans, which is excluded from management figures, was £27 million (2015: £25 million).

 

Cash contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £71 million (2015: £71 million).

 



 

UK pensions

 

The Group's two UK defined benefit pension schemes are currently undergoing triennial funding valuations as at 5 April 2016. Once the valuation process is complete, the 5 April 2016 funding deficit in each scheme will be confirmed and any incremental deficit contributions payable by the Group will be established. It is likely that some additional Group funding will be required, but given the early stage of negotiations with the scheme Trustees and the many variables involved in both establishing the valuation and agreeing any resulting recovery plan, the final outcome cannot currently be predicted with any reasonable degree of certainty. The current deficit funding payment is £42 million per year.

 

The accounting deficit for UK schemes increased to £1,234 million (31 December 2015: £912 million), following a decrease in discount rates.

 

Defined contribution pension schemes

 

In addition to defined benefit pension schemes, the Group also operates a number of defined contribution schemes for which the income statement charge was £28 million (2015: £20 million).

 

Net assets

 

Net assets of £4,007 million were £118 million higher than the 31 December 2015 figure of £3,889 million. The increase is primarily driven by management profit after tax of £265 million and currency retranslation from subsidiaries of £431 million, partially offset by a loss on remeasurement of defined benefit plans of £466 million and an adverse movement on the fair value of net investment hedges of £108 million.

 

Exchange rates

 

Exchange rates used for currencies most relevant to the Group's operations are:

 


Average

Period End


2016

2015

2016

2015

Euro

1.28

1.37

1.20

1.41

US dollar

1.43

1.53

1.33

1.57

 

The approximate impact on 2016 trading profit of subsidiaries and equity accounted investments of a 1% movement in the average rate would be euro - £1 million, US dollar - £2 million.



 

Funding, liquidity and going concern

 

At 30 June 2016, UK committed bank facilities were £865 million. Within this amount were committed Revolving Credit Facilities of £801 million, £48 million outstanding on an eight-year amortising facility from the European Investment Bank (EIB) and £16 million outstanding on a seven-year £16 million amortising facility from KfW.  There were drawings of £67 million against the Revolving Credit Facilities. There were also drawings of £31 million against uncommitted bank facilities.

 

Capital market borrowings at 30 June 2016 comprised a £350 million 6.75% annual unsecured bond maturing in October 2019 and a £450 million 5.375% semi-annual unsecured bond maturing in September 2022.  At 30 June 2016, the Group had net debt of £918 million (31 December 2015: £769 million), including the fair value of the cross currency interest rate swaps, a liability of £165 million (31 December 2015: £69 million liability).

 

All of the Group's committed credit facilities have financial covenants requiring EBITDA of subsidiaries to be at least 3.5 times net interest payable and for net debt to be no greater than 3 times EBITDA of subsidiaries.  The covenants are tested every six months using the previous 12 months' results. For the 6 months to 30 June 2016, EBITDA was 13.4 times greater than net interest payable, whilst net debt was 1.0 times EBITDA.

 

Following an assessment of the Group's principal risks and consideration of current financial forecasts the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial statements.

 

Basis of Reporting

 

The interim financial statements for the period are shown on pages 14 to 30 and have been prepared using accounting policies which were used in the preparation of audited financial statements for the year ended 31 December 2015 and which will form the basis of the 2016 Annual Report.

 

Definitions

 

Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries (excluding certain subsidiary businesses sold and closed) with the Group's share of the sales and trading profit of equity accounted investments. References to trading margins are to trading profit expressed as a percentage of sales. Management profit or loss before tax is management trading profit less net subsidiary interest payable and receivable and the Group's share of net interest payable and receivable and taxation of equity accounted investments. These figures better reflect performance of continuing businesses. Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations. Operating cash flow is cash generated from operations adjusted for capital expenditure, government capital grants, proceeds from disposal of fixed assets and government refundable advances.  Return on average invested capital (ROIC) is management trading profit as a percentage of average total net assets of continuing subsidiaries and equity accounted investments excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments.



 

Principal risks and uncertainties

 

As a finance, investment and holding company within the GKN Group, aside from holding the Group's external term loans and the sponsorship of the UK pension schemes, the Company's dealings are almost exclusively intra Group transactions. In this context the Company's significant risks and uncertainties remain largely unchanged from those reported on pages 3 to 5 of the Company's 2015 annual report. These risks relate to the following: pension deficit volatility, business continuity, currency translation and risks which could have a material impact on the Group's strategic objectives as listed on page 13 of GKN plc's 2016 Half Year Report Announcement.

 

On Thursday 23 June 2016 the UK voted to leave the EU, resulting in uncertain future trading arrangements between the UK and the rest of the world, and falling expectations for UK GDP in the short to medium term. GKN is a global business with over 90% of its products manufactured outside the UK; this will limit the effect of the vote on the Group. Weaker sterling following the referendum has so far had a positive effect on the Group's reported earnings but a negative impact on its reported debt and pension liabilities. Pension liabilities have also increased as a result of falling yields on long term bonds. Discussions with the trustees of the UK pension schemes in relation to the April 2016 funding valuation are progressing in a constructive manner.



 

 

Directors' Responsibility Statement

 

The half yearly financial report is the responsibility of the Directors who confirm that to the best of their knowledge:

 

·     the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as endorsed and adopted by the EU; and

 

·     the interim management report includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year.

 

The Directors of GKN Holdings plc are listed in the Company's annual report for 2015.

 

Approved by the Board of GKN Holdings plc and signed on its behalf by:

 

 

Adam Walker

Director

6 September 2016

 

 

 

 

APPENDICES

 

 


Page



GKN Holdings plc Condensed Consolidated Financial Statements




Consolidated Income Statement for the half year ended 30 June 2016

14







Consolidated Statement of Comprehensive Income for the half year ended 30 June 2016

15







Condensed Consolidated Statement of Changes in Equity for the half year ended 30 June 2016

16







Consolidated Balance Sheet at 30 June 2016

17







Consolidated Cash Flow Statement for the half year ended 30 June 2016

18







Notes to the Half Year Consolidated Financial Statements

19 - 30





 

 



 

CONSOLIDATED INCOME STATEMENT

FOR THE HALF YEAR ENDED 30 JUNE 2016




Unaudited



Notes

First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 






Sales

1a

4,237 

3,616 

7,231 







Trading profit

1b

348 

306 

610 


Change in value of derivative and other financial instruments

4

(71)

(20)

(122)


Amortisation of non-operating intangible assets arising on







business combinations


(46)

(36)

(80)


Gains and losses on changes in Group structure


(5)

(1)


Impairment charges


(71)


Reversal of inventory fair value adjustment arising on







business combinations


(12)


Restructuring charges

5

(22)






Operating profit


209 

245 

324 






Share of post-tax earnings of equity accounted






investments

6

34 

34 

59 







Interest payable


(41)

(34)

(72)


Interest receivable



Other net financing charges

7

(23)

(34)

(72)

Net financing costs


(61)

(67)

(137)






Profit before taxation 


182 

212 

246 






Taxation

8

(20)

(49)

(47)

Profit after taxation for the period


162 

163 

199 






Profit attributable to non-controlling interests


Profit attributable to owners of the parent


160 

160 

194 



162 

163 

199 

 

 



 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE HALF YEAR ENDED 30 JUNE 2016



Unaudited



Notes

First half 

First half 

Full year 

 



2016 

2015 

2015 

 



£m 

£m 

 £m 

 

Profit after taxation for the period


162 

163 

199 

 






 

Other comprehensive income:





 






 

Items that may be reclassified to profit or loss





 

Currency variations - subsidiaries





 


Arising in period


431 

(102)

74 

 


Reclassified in period


 

Currency variations - equity accounted investments





 


Arising in period


20 

(2)

 


Reclassified in period


 

Derivative financial instruments - transactional hedging





 


Arising in period


 


Reclassified in period


(5)

 

Net investment hedge changes in fair value





 


Arising in period


(108)

23 

(37)

 


Reclassified in period


 

Taxation

8

(36)

(5)

 



307 

(75)

37 

 






 

Items that will not be reclassified to profit or loss





 

Remeasurement of defined benefit plans





 


Subsidiaries

9

(466)

106 

139 

 

Taxation

8

110 

(28)

(42)

 



(356)

78 

97 

 






 

Other comprehensive income/(expense) for the period


(49)

134 

 






 

Total comprehensive income for the period


113 

166 

333 

 






 

Total comprehensive income for the period attributable to:





 


Non-controlling interests


 


Owners of the parent


109 

164 

329 

 



113 

166 

333 

 

 

 

 



 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE HALF YEAR ENDED 30 JUNE 2016



Notes

Share 
capital 
£m 

Share 
premium 
account 
£m 

Retained 
earnings 
£m 

Other 
reserves 
£m  

Equity 
attributable 
to equity 
holders 
of the 
parent 
£m 

Non-controlling

interests 
£m 

Total 
equity 
£m 

At 1 January 2016


362 

301 

3,358 

(155)

3,866 

23 

3,889 

Profit for the period


160 

160 

162 

Other comprehensive income/(expense)


(356)

305 

(51)

(49)

Total comprehensive income/(expense)


(196)

305 

109 

113 

Share-based payments


Shares received from Employee Share


(8)

(8)

(8)

  Ownership Plan Trust









Addition of non-controlling interests

13

At 30 June 2016 (unaudited)


362 

301 

3,158 

150 

3,971 

36 

4,007 










At 1 January 2015


362 

301 

3,066 

(193)

3,536 

22 

3,558 

Profit for the period


160 

160 

163 

Other comprehensive income/(expense)


78 

(74)

(1)

Total comprehensive income/(expense)


238 

(74)

164 

166 

Share-based payments


Dividends paid to non-controlling interests


(1)

(1)

At 30 June 2015 (unaudited)


362 

301 

3,305 

(267)

3,701 

23 

3,724 










At 1 January 2015


362 

301 

3,066 

(193)

3,536 

22 

3,558 

Profit for the year


194 

194 

199 

Other comprehensive income/(expense)


97 

38 

135 

(1)

134 

Total comprehensive income/(expense)


291 

38 

329 

333 

Share-based payments


Dividends paid to non-controlling interests


(3)

(3)

At 31 December 2015


362 

301 

3,358

(155)

3,866 

23 

3,889 

 



 

CONSOLIDATED BALANCE SHEET

AT 30 JUNE 2016




Unaudited



Notes

30 June 

30 June 

31 December 



2016 

2015 

2015 



£m 

£m 

£m 

Assets





Non-current assets





Goodwill


665 

491 

591 

Other intangible assets


1,341 

911 

1,265 

Property, plant and equipment

11

2,484 

2,014 

2,200 

Equity accounted investments


194 

151 

195 

Other receivables and investments


47 

35 

42 

Derivative financial instruments


28 

18 

21 

Deferred tax assets


509 

314 

388 



5,268 

3,934 

4,702 

Current assets





Inventories


1,370 

1,000 

1,170 

Trade and other receivables


1,652 

1,259 

1,311 

Amounts receivable from parent undertaking


2,100 

2,154 

2,009 

Current tax assets


Derivative financial instruments


16 

13 

Other financial assets


Cash and cash equivalents

10

227 

273 

299 



5,374 

4,704 

4,816 

Total assets


10,642 

8,638 

9,518 






Liabilities





Current liabilities





Borrowings


(136)

(103)

(137)

Derivative financial instruments


(166)

(87)

(151)

Trade and other payables


(2,028)

(1,561)

(1,757)

Amounts payable to parent undertaking


(9)

(10)

(6)

Current tax liabilities


(151)

(120)

(121)

Provisions


(78)

(51)

(78)



(2,568)

(1,932)

(2,250)

Non-current liabilities





Borrowings


(849)

(871)

(867)

Derivative financial instruments


(430)

(152)

(294)

Deferred tax liabilities


(165)

(145)

(157)

Trade and other payables


(447)

(199)

(425)

Provisions


(75)

(82)

(78)

Post-employment obligations

9

(2,101)

(1,533)

(1,558)



(4,067)

(2,982)

(3,379)

Total liabilities


(6,635)

(4,914)

(5,629)

Net assets


4,007 

3,724 

3,889 






Shareholders' equity





Share capital


362 

362 

362 

Share premium account


301 

301 

301 

Retained earnings


3,158 

3,305 

3,358 

Other reserves


150 

(267)

(155)

Equity attributable to equity holders of the parent


3,971 

3,701 

3,866 

Non-controlling interests


36 

23 

23 

Total equity


4,007 

3,724 

3,889 



 

CONSOLIDATED CASH FLOW STATEMENT

FOR THE HALF YEAR ENDED 30 JUNE 2016




Unaudited



Notes

First half 

First half 

Full year 



2016 

2015 

2015 



 £m 

 £m 

£m 

Cash flows from operating activities





Cash generated from operations

10

164 

155 

940 

Interest received


15 

Interest paid


(26)

(22)

(69)

Tax paid


(45)

(61)

(115)

Dividends received from equity accounted investments


55 

55 

55 



151 

128 

826 

Cash flows from investing activities





Purchase of property, plant and equipment


(198)

(167)

(332)

Receipt of government capital grants


Purchase of intangible assets


(35)

(32)

(81)

Proceeds from sale and realisation of fixed assets


25 

Payment of deferred and contingent consideration


(1)

(1)

(7)

Acquisitions of subsidiaries (net of cash acquired)

13

(8)

(8)

(117)

Repayment of debt acquired in business combinations


(371)

Equity accounted investments loan settlement


Investment in equity accounted investments


(2)



(207)

(207)

(894)

Cash flows from financing activities





Shares received from Employee Share Ownership





    Plan Trust


(8)

Amounts placed on deposit


(2)

Proceeds from borrowing facilities


102 

75 

485 

Repayment of other borrowings


(134)

(24)

(423)

Dividends paid to non-controlling interests


(1)

(3)



(40)

50 

57 

Movement in cash and cash equivalents


(96)

(29)

(11)

Cash and cash equivalents at beginning of period


291 

317 

317 

Currency variations on cash and cash equivalents


29 

(19)

(15)

Cash and cash equivalents at end of period

10

224 

269 

291 



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS

FOR THE HALF YEAR ENDED 30 JUNE 2016

 

1

Segmental analysis


 

The Group's reportable segments have been determined based on reports reviewed by the Executive Committee led by the Chief Executive.  The operating activities of the Group are largely structured according to the markets served; aerospace, automotive, and the land systems agricultural, construction and industrial markets.  Automotive is managed according to product groups; driveline and powder metallurgy.  Reportable segments derive their sales from the manufacture of product and sale of service.  Revenue from inter segment trading and royalties is not significant.  There have been no changes to segments in the period.

 

a)

Sales






Automotive







Powder 

Land 




Aerospace 

Driveline 

Metallurgy 

Systems 

Total 



£m 

£m 

£m 

£m 

£m 


FIRST HALF 2016 (unaudited)







Subsidiaries

1,768 

499 

354 



Equity accounted investments

33 

234 

14 




1,631 

2,002 

499 

368 

4,500 


Other businesses





18 


Management sales





4,518 


Less:  Equity accounted investments sales





(281)


Income statement - sales





4,237 









FIRST HALF 2015 (unaudited)







Subsidiaries

1,171 

1,590 

474 

358 



Equity accounted investments

224 

13 




1,171 

1,814 

474 

371 

3,830 


Other businesses





23 


Management sales





3,853 


Less:  Equity accounted investments sales





(237)


Income statement - sales





3,616 









FULL YEAR 2015


Subsidiaries

2,387 

3,124 

906 

670 



Equity accounted investments

424 

23 




2,387 

3,548 

906 

693 

7,534 


Acquisitions







Subsidiaries

102 



Equity accounted investments

11 




113 

113 


Other businesses





42 


Management sales





7,689 


Less:  Equity accounted investments sales





(458)


Income statement - sales





7,231 








 



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016

1

Segmental analysis (continued)

b)

Trading profit











Automotive







Powder 

Land 




Aerospace 

Driveline 

Metallurgy 

Systems 

Total 



£m 

£m 

£m 

£m 

£m 


FIRST HALF 2016 (unaudited)







Trading profit before depreciation and amortisation

221 

185 

85 

23 



Depreciation of property, plant and equipment

(38)

(55)

(21)

(7)



Amortisation of operating intangible assets

(24)

(5)

(1)



Trading profit - subsidiaries

159 

125 

63 

16 



Trading profit - equity accounted investments

39 




161 

164 

63 

17 

405 


Other businesses





(4)


Corporate and unallocated costs





(11)


Management trading profit





390 


Less: Equity accounted investments trading profit





(42)


Income Statement - trading profit





348 









FIRST HALF 2015 (unaudited)







Trading profit before depreciation and amortisation

176 

164 

75 

22 



Depreciation of property, plant and equipment

(28)

(50)

(19)

(8)



Amortisation of operating intangible assets

(15)

(3)



Trading profit - subsidiaries

133 

111 

56 

14 



Trading profit - equity accounted investments

39 




133 

150 

56 

15 

354 









Other businesses





(2)


Acquisition charges - Fokker





(3)


Corporate and unallocated costs





(3)


Management trading profit





346 


Less: Equity accounted investments trading profit





(40)


Income Statement - trading profit





306 









FULL YEAR 2015


Trading profit before depreciation and amortisation

383 

329 

148 

39 



Depreciation of property, plant and equipment

(59)

(101)

(38)

(15)



Amortisation of operating intangible assets

(33)

(7)

(1)

(1)



Trading profit - subsidiaries

291 

221 

109 

23 



Trading profit - equity accounted investments

69 




291 

290 

109 

24 

714 









Acquisitions







Subsidiaries

(5)



Acquisition related charges

(13)




(18)

(18)


Other businesses






Corporate and unallocated costs





(17)


Management trading profit




680 


Less: Equity accounted investments trading profit





(70)


Income Statement - trading profit





610 


 

No income statement items between trading profit and profit before tax are allocated to management trading profit, which is the Group's segmental measure of profit or loss.

 

 



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016

 

1

Segmental analysis (continued)



c)

Goodwill, fixed assets and working capital - subsidiaries only






Automotive







Powder 

Land 




Aerospace 

Driveline 

Metallurgy 

Systems 

Total 



£m 

£m 

£m 

£m 

£m 


FIRST HALF 2016 (unaudited)







Property, plant and equipment and operating intangible








assets

1,285 

1,229 

436 

139 

3,089 


Working capital

258 

115 

147 

91 

611 


Net operating assets

1,543 

1,344 

583 

230 



Goodwill and non-operating intangible assets

901 

282 

36 

147 



Net investment

2,444 

1,626 

619 

377 










FIRST HALF 2015 (unaudited)







Property, plant and equipment and operating intangible








assets

1,050 

949 

357 

121 

2,477 


Working capital

208 

116 

100 

76 

500 


Net operating assets

1,258 

1,065 

457 

197 



Goodwill and non-operating intangible assets

487 

253 

27 

131 



Net investment

1,745 

1,318 

484 

328 










FULL YEAR 2015


Property, plant and equipment and operating intangible








assets

1,208 

1,049 

375 

128 

2,760 


Working capital

159 

22 

97 

64 

342 


Net operating assets

1,367 

1,071 

472 

192 



Goodwill and non-operating intangible assets

841 

258 

29 

134 



Net investment

2,208 

1,329 

501 

326 




d)

Inter segment sales


Subsidiary segmental sales gross of inter segment sales are; Aerospace £1,599 million (first half 2015: £1,171 million, full year 2015: £2,489 million), Driveline £1,796 million (first half 2015: £1,617 million, full year 2015: £3,176 million), Powder Metallurgy £501 million (first half 2015: £475 million, full year 2015: £908 million) and Land Systems £355 million (first half 2015: £360 million, full year 2015: £672 million).



e)

Reconciliation of segmental property, plant and equipment and operating intangible assets to the Balance Sheet






Unaudited







First half 

First half 

Full year 






2016 

2015 

2015 






£m 

£m 

£m 


Segmental analysis - property, plant and equipment and operating intangible






assets

3,089 

2,477 

2,760 


Segmental analysis - goodwill and non-operating intangible assets

1,366 

898 

1,262 


Goodwill

(665)

(491)

(591)


Other businesses

26 

32 

25 


Corporate assets


Balance Sheet - property, plant and equipment and other intangible assets

3,825 

2,925 

3,465 



f)

Reconciliation of segmental working capital to the Balance Sheet







Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 


Segmental analysis - working capital

611 

500 

342 


Other businesses

11 

15 

13 


Corporate items

(24)

(24)

(45)


Accrued interest

(34)

(26)

(25)


Restructuring provisions

(1)

(2)

(1)


Equity accounted investment funding

(14)

(4)

(10)


Deferred and contingent consideration

(11)

(12)

(3)


Government refundable advances

(97)

(46)

(86)


Balance Sheet - inventories, trade and other receivables, trade and other






payables and provisions

441 

401 

185 



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016

 

2

Basis of preparation


These half year condensed consolidated financial statements for the six months ended 30 June 2016 have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting as adopted by the European Union and the Disclosure and Transparency Rules of the Financial Conduct Authority.  These financial statements have been prepared on a going concern basis.  These financial statements, which are unaudited and unreviewed, provide an update of previously reported information and should be read in conjunction with the audited consolidated financial statements for the year ended 31 December 2015, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS).

 

These financial statements do not constitute statutory accounts as defined in section 434 of the Companies Act 2006.  A copy of the audited consolidated statutory financial statements for the year ended 31 December 2015 has been delivered to the Registrar of Companies.  The auditors' report on these financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

 

 


Accounting policies

The accounting policies and methods of presentation applied in these financial statements are the same as those applied in the audited consolidated financial statements for the year ended 31 December 2015.

 

Estimates, judgements and assumptions

The Group's significant accounting policies are set out in the audited consolidated financial statements for the year ended 31 December 2015.  Application of the Group's accounting policies requires the use of estimates, subjective judgement and assumptions.  The Directors base these estimates, judgements and assumptions on a combination of past experience, professional expert advice and other evidence that is relevant to the particular circumstance. 

 

The accounting policies where the Directors consider the more complex estimates, judgements and assumptions have to be made are those in respect of business combinations, post-employment obligations, derivative and other financial instruments, taxation, provisions and impairment of non-current assets.  Details of the principal estimates, judgements and assumptions are set out in notes 30, 24, 4b, 20, 6, 21 and 11 of the audited consolidated financial statements for the year ended 31 December 2015 as updated in notes 13 (Business combinations), 9 (Post-employment obligations), 4 (Change in value of derivative and other financial instruments) and 8 (Taxation) of these financial statements.

 

Date of approval
These financial statements were approved by the Board of Directors on 6 September 2016.

 



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016


3

Adjusted performance measures



(a)

Reconciliation of reported and management performance measures

 


FIRST HALF 2016 (unaudited)




As 
reported 

Equity 
accounted 
investments

Adjusting 
and non- 
trading items

Management 
basis 



£m 

£m 

£m 

£m 


Sales

4,237 

281 

4,518 








Trading profit

348 

42 

390 


Change in value of derivative and other financial instruments

(71)

71 


Amortisation of non-operating intangible assets arising on







business combinations

(46)

46 


Restructuring charges

(22)

22 


Operating profit

209 

42 

139 

390 








Share of post-tax earnings of equity accounted investments

34 

(42)

(8)








Interest payable

(41)

(41)


Interest receivable


Other net financing charges

(23)

23 


Net financing costs

(61)

23 

(38)


Profit before taxation

182 

162 

344 








Taxation

(20)

(59)

(79)


Profit after taxation for the period

162 

103 

265 


Profit attributable to non-controlling interests

(2)

(2)


Profit attributable to owners of the parent

160 

103 

263 








FIRST HALF 2015 (unaudited)




As 
reported 

Equity 
accounted 
investments

Adjusting 
and non- 
trading items

Management 
basis 



£m 

£m 

£m 

£m 


Sales

3,616 

237 

3,853 








Trading profit

306 

40 

346 


Change in value of derivative and other financial instruments

(20)

20 


Amortisation of non-operating intangible assets arising on







business combinations

(36)

36 


Gains and losses on changes in Group structure

(5)


Operating profit

245 

40 

61 

346 








Share of post-tax earnings of equity accounted investments

34 

(40)

(6)








Interest payable

(34)

(34)


Interest receivable


Other net financing charges

(34)

34 


Net financing costs

(67)

34 

(33)


Profit before taxation

212 

95 

307 








Taxation

(49)

(20)

(69)


Profit after taxation for the period

163 

75 

238 


Profit attributable to non-controlling interests

(3)

(3)


Profit attributable to owners of the parent

160 

75 

235 








FULL YEAR 2015



For the year ended 31 December 2015, management sales were £7,689 million, management trading profit was £680 million and management profit before tax was £604 million.

 

 



 

 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016


3

Adjusted performance measures (continued)



(b)

Summary by segment

 



FIRST HALF 2016 (unaudited)






Sales 

Trading 
profit
 

Margin 



£m 

£m 



Aerospace

1,631 

161 

9.9% 


Driveline

2,002 

164 

8.2% 


Powder Metallurgy

499 

63 

12.6% 


Land Systems

368 

17 

4.6% 


Other businesses

18 

(4)



Corporate and unallocated costs

(11)




4,518 

390 

8.6% 







FIRST HALF 2015 (unaudited)






Sales 

Trading 
profit 

Margin 



£m 

£m 



Aerospace

1,171 

133 

11.4%


Driveline

1,814 

150 

8.3%


Powder Metallurgy

474 

56 

11.8%


Land Systems

371 

15 

4.0%


Other businesses

23 

(2)



Corporate and unallocated costs

(6)




3,853 

346 

9.0%







FULL YEAR 2015




Sales 

Trading 
profit 

Margin 



£m 

£m 



Aerospace

2,387 

291 

12.2%


Driveline

3,548 

290 

8.2%


Powder Metallurgy

906 

109 

12.0%


Land Systems

693 

24 

3.5%


Other businesses

42 



Acquisition - Fokker (Aerospace)

113 

(18)



Corporate and unallocated costs

(17)




7,689 

680 

8.8%






 

 



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016

 

4

Change in value of derivative and other financial instruments



Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 


Forward currency contracts (not hedge accounted)

(52)

(31)

(103)


Embedded derivatives



(49)

(31)

(102)


Net gains and losses on intra-group funding






Arising in period

(22)

11 

(20)


Change in value of derivative and other financial instruments

(71)

(20)

(122)







Forward foreign currency contracts, cross currency interest rate swaps and embedded derivatives (all level 2) are valued using observable rates and published prices together with forecast cash flow information where applicable, consistent with the prior year.  The amount in respect of embedded derivatives represents a commercial contract denominated in US dollars between European Aerospace subsidiaries and a customer outside the USA.

 

Carrying values of derivative instruments at 30 June 2016 were; forward currency contracts liability of £399 million (31 December 2015: liability of £351 million), embedded derivatives asset of £12 million (31 December 2015: asset of £9 million) and cross currency interest rate swaps liability of £165 million (31 December 2015: liability of £69 million).






5

Restructuring charges



Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

 £m 


Redundancy and integration costs

(22)


Restructuring charges

(22)







Restructuring charges of £22 million, separately identified, relate to the recently acquired Fokker Technologies Group B.V. business within Aerospace.






6

Share of post-tax earnings of equity accounted investments



Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 


Sales

281 

237 

458 


Operating costs

(239)

(197)

(388)


Trading profit

42 

40 

70 


Net financing costs

(1)


Profit before taxation

42 

40 

69 


Taxation

(8)

(6)

(10)


Share of post-tax earnings - before adjusting and non-trading items

34 

34 

59 


Adjusting and non-trading items


Share of post-tax earnings

34 

34 

59 


7

Other net financing charges



Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 


Interest charge on net defined benefit plans

(27)

(25)

(49)


Fair value changes on cross currency interest rate swaps

(6)

(17)


Unwind of discounts

(1)

(3)

(6)


Other net financing charges

(23)

(34)

(72)



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016

 

8

 

Taxation

 


The tax charge for the period is based on an estimate of the Group's expected annual effective rate of tax for 2016 based on tax legislation substantively enacted at 30 June 2016 applied to taxable profit for the period ended 30 June 2016.





Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 


Tax included in the income statement





Analysis of tax charge in the period





Current tax (charge)/credit






Current period charge

(69)

(77)

(127)



Utilisation of previously unrecognised tax losses and other assets

38 



Adjustments in respect of prior periods



Net movement on provisions for uncertain tax positions

(23)



(66)

(66)

(110)


Deferred tax

46 

17 

63 


Total tax charge for the period

(20)

(49)

(47)







Analysed as:





Tax in respect of management profit





Current tax

(66)

(66)

(111)


Deferred tax

(13)

(3)

(26)



(79)

(69)

(137)


Tax in respect of items excluded from management profit





Current tax


Deferred tax

59 

20 

89 



59 

20 

90 


Total tax charge for the period

(20)

(49)

(47)





Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 


Tax included in other comprehensive income





Current tax on post-employment obligations

4 


Current tax on foreign currency gains and losses on intra-group funding

(6)


Deferred tax on post-employment obligations

108 

(30)

(46)


Deferred tax on foreign currency gains and losses on intra-group funding

(36)



74 

(26)

(47)

 

 

 

 

UK tax rate reduction

 

A reduction in the mainstream rate of UK corporation tax from 20% to 19% from 1 April 2017 and to 18% from 1 April 2020 have been substantively enacted.  UK temporary differences are measured at the rate they are expected to reverse.

 

The Finance Bill 2016 provides for a further rate reduction to 17% which is expected to be substantively enacted in the Autumn 2016.  The most significant impact of this reduction will be on deferred tax assets related to post-employment obligations which have been recognised through equity.

 



 

 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016



9

Post-employment obligations

 


Actuarial assessments of the key defined benefit pension and post-employment medical plans (representing 97% of liabilities and 98% of assets) were carried out as at 30 June 2016.




Movement in post-employment obligations during the period:



Unaudited




First half 

First half 

Full Year 



2016 

2015 

2015 



£m 

£m 

£m 


At 1 January

(1,558)

(1,711)

(1,711)


Current service cost

(25)

(27)

(50)


Past service


Businesses acquired

(7)


Administrative costs

(2)

(1)

(3)


Interest on net defined benefit plans

(27)

(25)

(49)


Remeasurement of defined benefit plans

(466)

106 

139 


Contributions/benefits paid

71 

71 

100 


Currency variations

(94)

48 

19 


At end of period

(2,101)

(1,533)

(1,558)




Post-employment obligations as at the period end comprise:



Unaudited




30 June 

30 June 

31 December 



2016 

2015 

2015 



£m 

£m 

£m 


Pensions

- funded

(1,329)

(967)

(977)



- unfunded

(683)

(489)

(505)


Medical

- funded

(38)

(27)

(30)



- unfunded

(51)

(50)

(46)




(2,101)

(1,533)

(1,558)










UK 

Americas 

Europe 

ROW 

Total 



£m 

£m 

£m 

£m 

£m 


At 30 June 2016 - unaudited

(1,234)

(173)

(676)

(18)

(2,101)


At 30 June 2015 - unaudited

(920)

(117)

(483)

(13)

(1,533)


At 31 December 2015

(912)

(133)

(498)

(15)

(1,558)







 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016


9

Post-employment obligations (continued)


Assumptions




The major assumptions used were:





UK

Americas 

 Europe 

ROW 



GKN1 

GKN2 







At 30 June 2016 - unaudited







Rate of increase in pensionable salaries

n/a 

3.80 

n/a 

2.50 


Rate of increase in payment and deferred pensions

2.80 

2.80 

n/a 

1.75 

n/a 


Discount rate

2.75 

2.95 

3.60 

1.30 

0.80 


Inflation assumption

2.80 

2.80 

n/a 

1.75 

n/a 


Rate of increase in medical costs:








Initial/long term

5.4/5.4

7.0/5.0 

n/a 

n/a 


At 30 June 2015 - unaudited







Rate of increase in pensionable salaries

n/a 

4.20 

n/a 

2.50 


Rate of increase in payment and deferred pensions

3.20 

3.20 

n/a 

1.75 

n/a 


Discount rate

3.50 

3.75 

4.40 

2.20 

0.80 


Inflation assumption

3.20 

3.20 

n/a 

1.75 

n/a 


Rate of increase in medical costs:








Initial/long term

5.5/5.5

7.0/5.0 

n/a

n/a 


At 31 December 2015







Rate of increase in pensionable salaries

n/a 

4.10/4.15 

n/a 

2.50 


Rate of increase in payment and deferred pensions

3.05 

3.10 

n/a 

1.75 

n/a 


Discount rate

3.55 

3.85/4.05 

4.30 

2.40 

0.80 


Inflation assumption

3.05 

3.10/3.15 

n/a 

1.75 

n/a 


Rate of increase in medical costs:








Initial/long term

5.4/5.4

7.0/5.0 

n/a 

n/a 




The table above at 31 December 2015 specifies separate assumptions for past and future service in relation to the UK schemes.

Consistent with the prior period and year end, the UK discount rate at 30 June 2016 is based on AA corporate bonds with duration weighted to the UK pension schemes' liabilities, derived from the Mercer pension discount yield curve.  The methodologies used to derive the German and US discount rates were similarly consistent with those used at 31 December 2015.

The UK scheme mortality assumptions are based on S1NA (year of birth) mortality tables with CMI 2013 improvements and a 1.25% long term improvement trend.  In Germany RT2005-G tables were used, whilst RP-2014 tables were used in the US.




Assumption sensitivity analysis

 

The impact of a one percentage point movement in the primary assumptions for the defined benefit net obligations as at 30 June 2016 is set out below:





UK 

Americas 

Europe 

ROW 



£m 

£m 

£m 

£m 


Discount rate +1%

509 

44 

101 


Discount rate -1%

(663)

(55)

(126)

(2)


Rate of inflation +1%

(583)

(1)

(105)


Rate of inflation -1%

427 

89 


Life expectancy +1 year

(110)

(9)

(24)


Life expectancy -1 year

109 

21 




UK deficit funding

 

The Group's two UK defined benefit pension schemes are currently undergoing triennial funding valuations as at 5 April 2016. Once the valuation process is complete, the 5 April 2016 funding deficit in each scheme will be confirmed and any incremental deficit contributions payable by the Group will be established.  It is likely that some additional Group funding will be required, but given the early stage of negotiations with the scheme Trustees and the many variables involved in both establishing the valuation and agreeing any resulting recovery plan, the final outcome cannot currently be predicted with any reasonable degree of certainty.  Following the previous triennial valuation in the UK, additional deficit funding payments of £10 million per year have continued and there is potential for further payments commencing in 2017, contingent upon asset performance.  In addition the Group agreed, during 2014, to pay £2 million per year for 4 years to the UK scheme, GKN 1, to cover a funding requirement arising from a £123 million bulk annuity purchase.

 

During the period the Group paid £30 million (first half 2015: £30 million, full year 2015: £30 million) to the 2 UK pension schemes through its pension partnership arrangement.

 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016


10

Cash flow notes





Unaudited




First half 

First half 

Full year 



2016 

2015 

2015 



£m 

£m 

£m 


Cash generated from operations





Operating profit

209 

245 

324 


Adjustments for:





Depreciation, impairment and amortisation of fixed assets






Charged to trading profit







Depreciation

124 

106 

218 




Amortisation

31 

20 

43 



Amortisation of non-operating intangible assets arising on business







combinations

46 

36 

80 



Impairment charges

71 


Change in value of derivative and other financial instruments

71 

20 

122 


Gains and losses on changes in Group structure


Amortisation of government capital grants

(1)

(1)

(2)


Net loss/(profit) on sale/realisation of fixed assets

(3)


Charge for share-based payments


Movement in post-employment obligations

(44)

(49)

(51)


Change in amounts due from Parent undertaking

(91)

(90)

55 


Change in amounts due to Parent undertaking

(1)


Change in inventories

(63)

(61)

(33)


Change in receivables

(184)

(71)

110 


Change in payables and provisions

59 

(10)



164 

155 

940 







Movement in net debt





Net movement in cash and cash equivalents

(96)

(29)

(11)


Net movement in borrowings and deposits

32 

(51)

(60)


Movement on finance leases

(2)


Movement on cross currency interest rate swaps

(96)

16 

(43)


Movement on other net investment hedges

(12)

(11)


Amortisation of debt issue costs

(1)

(1)

(2)


Currency variations

24 

(19)

(16)


Movement in period

(149)

(84)

(145)


Net debt at beginning of period

(769)

(624)

(624)


Net debt at end of period

(918)

(708)

(769)







Reconciliation of cash and cash equivalents





Cash and cash equivalents per balance sheet

227 

273 

299 


Bank overdrafts included within "current liabilities - borrowings"

(3)

(4)

(8)


Cash and cash equivalents per cash flow

224 

269 

291 




The fair values of most financial instruments approximate to carrying value either due to the short-term maturity of the instruments or because interest rates are reset frequently, with the exception of borrowings and government refundable advances which are carried at amortised cost.  The carrying value of borrowings at 30 June 2016 was £930 million (first half 2015: £952 million) with a fair value of £1,035 million (first half 2015: £1,054 million) and the carrying value of government refundable advances at 30 June 2016 was £97 million (first half 2015: £46 million) with a fair value of £115 million (first half 2015: £45 million).

 



 

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)

FOR THE HALF YEAR ENDED 30 JUNE 2016


11

Property, plant and equipment (unaudited)




During the period ended 30 June 2016 the Group asset additions were £166 million (first half 2015: £138 million).  Assets with a carrying value of £25 million (first half 2015: £3 million) were disposed of during the period ended 30 June 2016.

 

12

Related party transactions (unaudited)




In the ordinary course of business, sales and purchases of goods take place between subsidiaries and equity accounted investment companies priced on an 'arm's length' basis.  The Group also provides short-term financing facilities to equity accounted investment companies.  There have been no significant changes in the nature of transactions between subsidiaries and equity accounted investment companies that have materially affected the financial statements in the period.  Similarly, there has been no material impact on the financial statements arising from changes in the aggregate compensation of key management. 

 

13

Other financial information (unaudited)




Commitments relating to future capital expenditure not provided by subsidiaries at 30 June 2016 amounted to £189 million (30 June 2015: £134 million) and the Group's share not provided by equity accounted investments amounted to £23 million (30 June 2015: £8 million).

 

On 22 June 2016, the Group repaid the second of five annual instalments of £16 million on its £80 million European Investment Bank Loan.

 

On 30 June 2016 the Group took control, through a 60% equity shareholding, of a newly formed company; GKN (Bazhou) Metal Powder Company Limited (Bazhou).  Bazhou specialises in metal powder production in China.

 

The fair value of consideration for the 60% shareholding is £17 million and comprises an initial cash payment of £8 million and deferred consideration of £9 million.  The fair value of net assets acquired, before non-controlling interests, of £26 million comprises; property, plant and equipment of £15 million, inventory of £3 million, receivables of £4 million and provisional goodwill of £4 million.  Due to the proximity of the transaction to the reporting date, a formal valuation exercise will be performed in the second half of the year to appropriately allocate the fair value of assets and liabilities acquired.  Bazhou has been included in Powder Metallurgy for segmental reporting.

 

14

Contingent assets and liabilities (unaudited)




Since 2003, the Group has been involved in litigation with HMRC in respect of various advance corporate tax payments and corporate tax paid on certain foreign dividends which, in its view, were levied by HMRC in breach of the Group's EU community law rights.  The most recent High Court judgment in the case was published in December 2014.  This judgement was broadly positive but HMRC appealed the decision and a hearing took place in June 2016 in the Court of Appeal.  A judgement is expected towards the end of 2016.  There has been a recent judgement in the Prudential case from the Court of Appeal considering similar issues which was also broadly favourable, however, HMRC appealed this judgement to the Supreme Court.

 

The continuing complexity of the remaining case and uncertainty over the issues raised (and in particular which points HMRC may seek to appeal) means that it is not possible to predict the final outcome of the litigation with any reasonable degree of certainty.

 

There are no other material contingent assets at 30 June 2016 or 30 June 2015.  At 30 June 2016 the Group had no contingent liabilities in respect of bank arrangements and no guarantees (30 June 2015: none).  In the case of certain businesses, performance bonds and customer finance obligations have been entered into in the normal course of business.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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